My understanding (and please correct me if I'm wrong) is that an 'upgrade' is really a fresh installation, with your user data migrated across afterwards. In that context it's not really a 'removal' as such -- and it's hard to see how else they'd do it.

I'm actually glad they made this change. In the past, XQuartz was sometimes ahead of the officially distributed version, which could be messy. Now they're the same thing.

If the old version of X11 will not function on 10.8, it does.

Except that XQuartz in the past installed itself to various system paths on Mac OS X. When you "upgrade" the OS the installer moves everything installed out of the way and basically does a clean install of the OS. At the end it copies over everything in paths that it doesn't control (mainly /Users, /usr/local, (/usr/<everything else> gets wiped), /Applications, /opt and others). Anything that is core to the OS will basically be in a clean install state.

For example, I've written some custom device drives for OS X that were installed in the system path (being kexts and all), those were removed. They weren't specifically compatible with OS X Mountain Lion, so it makes sense.

+1. <black humor>Next time they remove Dropbox because it might be a conflict of interest with iCloud. And then...</black humor>